Oil Market Report - September 2020

• Global oil supply rose by 1.1 mb/d in August to 91.7 mb/d as OPEC+ cuts eased, but was down 9.3 mb/d on a year ago. Following two months of gains, the recovery in countries outside the OPEC+ deal stalled in August. Production in the United States fell by 0.4 mb/d as Hurricane Laura forced precautionary shut-ins. Total non-OPEC supply is expected to drop by 2.6 mb/d in 2020, before posting a modest 0.5 mb/d recovery next year.
• A resurgence of Covid-19 cases in many countries, local lockdown measures, continued teleworking and the weak aviation sector led to downward revisions of our demand estimates for 3Q20 and 4Q20 by 0.1 mb/d and 0.6 mb/d, respectively. For 2020, demand will fall versus 2019 by 8.4 mb/d, more than the 8.1 mb/d seen in the last Report. In 2021, demand will grow by 5.5 mb/d. China continues to recover strongly while India is showing renewed weakness.
• The recovery in global refining throughput is expected to slow from August to October due to the impact of hurricane shutdowns in the US Gulf and seasonal maintenance elsewhere. Chinese and Indian refinery runs fell in July and Hurricane Laura cut short the US recovery. The hurricane shutdowns resulted in only a brief spike in refinery margins, which remain depressed due to weak demand for premium transport fuels.
• OECD industry stocks rose by 13.5 mb (0.44 mb/d) to 3 225 mb in July. For the year to July, they have increased by 334.5 mb, at an average rate of 1.57 mb/d. Preliminary data for August show that industry crude stocks fell in all three regions: -19.3 mb in the US, -9.8 mb in Europe and -1.3 mb in Japan (in total, nearly 1 mb/d). In August, volumes of crude in floating storage fell sharply by 59.9 mb (1.93 mb/d) to 168.4 mb, but early reports suggest volumes might rise in September.
• Crude futures prices rose until late August when weak financial markets and a growing overhang of unsold barrels triggered a steady fall into September. Reports of floating storage also weighed on sentiment. Reduced buying by China, which has lent support since April, is a major factor. From $46.16/bbl in late August, Brent futures have fallen below $40/bbl. Physical prices (e.g. Dated Brent) have moved to a significant discount versus futures, usually a sign of market

• Global oil supply rose by 1.1 mb/d in August to 91.7 mb/d as OPEC+ cuts eased, but was down 9.3 mb/d on a year ago. Following two months of gains, the recovery in countries outside the OPEC+ deal stalled in August. Production in the United States fell by 0.4 mb/d as Hurricane Laura forced precautionary shut-ins. Total non-OPEC supply is expected to drop by 2.6 mb/d in 2020, before posting a modest 0.5 mb/d recovery next year.
• A resurgence of Covid-19 cases in many countries, local lockdown measures, continued teleworking and the weak aviation sector led to downward revisions of our demand estimates for 3Q20 and 4Q20 by 0.1 mb/d and 0.6 mb/d, respectively. For 2020, demand will fall versus 2019 by 8.4 mb/d, more than the 8.1 mb/d seen in the last Report. In 2021, demand will grow by 5.5 mb/d. China continues to recover strongly while India is showing renewed weakness.
• The recovery in global refining throughput is expected to slow from August to October due to the impact of hurricane shutdowns in the US Gulf and seasonal maintenance elsewhere. Chinese and Indian refinery runs fell in July and Hurricane Laura cut short the US recovery. The hurricane shutdowns resulted in only a brief spike in refinery margins, which remain depressed due to weak demand for premium transport fuels.
• OECD industry stocks rose by 13.5 mb (0.44 mb/d) to 3 225 mb in July. For the year to July, they have increased by 334.5 mb, at an average rate of 1.57 mb/d. Preliminary data for August show that industry crude stocks fell in all three regions: -19.3 mb in the US, -9.8 mb in Europe and -1.3 mb in Japan (in total, nearly 1 mb/d). In August, volumes of crude in floating storage fell sharply by 59.9 mb (1.93 mb/d) to 168.4 mb, but early reports suggest volumes might rise in September.
• Crude futures prices rose until late August when weak financial markets and a growing overhang of unsold barrels triggered a steady fall into September. Reports of floating storage also weighed on sentiment. Reduced buying by China, which has lent support since April, is a major factor. From $46.16/bbl in late August, Brent futures have fallen below $40/bbl. Physical prices (e.g. Dated Brent) have moved to a significant discount versus futures, usually a sign of market

The uncertainty created by Covid-19 shows little sign of abating. In Europe, the number of new cases has risen as the holiday season ends, though the rate of hospitalisations and deaths is lower than seen earlier this year. Case numbers in the United States are falling and the situation seems to be improving in Japan and Korea. However, in various places, the situation is worrying and we are seeing localised lockdowns. Some countries, for example France and the UK, have introduced measures such as mask-wearing obligations and restrictions on gatherings and they may yet go further to fight the pandemic. These developments weigh heavily on economic activity and lead to lower expectations for a recovery in energy demand. Home working reduces demand but fear of using public transport is leading many workers to use personal vehicles. Factoring these unprecedented developments into conventional analysis is very challenging, to say the least.

New data show that global demand from January to July was 10.5 million barrels per day below last year’s level. As national lockdowns eased there was an initial sharp recovery in demand led by gasoline, but the curve has flattened out and it is becoming increasingly apparent that Covid-19 will stay with us for some time. For example, India has seen a continued upsurge in Covid-19 cases, contributing in August to the biggest month-on-month fall of oil demand there since April. In this Report, we have reduced our estimate for global demand growth in the second half of this year by 0.4 mb/d. For 2020 as a whole, we see the fall in demand versus 2019 at 8.4 mb/d, slightly deeper than last month. At 91.7 mb/d, demand has returned to its level in 2013.

In August, we saw the first impact of the easing of OPEC+ production cuts from 9.7 mb/d to 7.7 mb/d. We estimate the actual output increase by the group at 1.3 mb/d as some countries produced less than their target to compensate for earlier non-compliance. On the downside, the United States saw output drop by 0.4 mb/d in August due to Hurricane Laura but it is recovering in September as additional shut-in volumes come back on line.

With global output increasing overall, plus our downwardly revised demand data, we now calculate implied stock draws in the second half of the year at about 3.4 mb/d, nearly 1 mb/d less than estimated in last month’s Report. Stock draws suggest firmer prices but the front of the price curve moved down during August and prices for physical barrels (Dated Brent) fell below front-month futures, usually a sign of weakness. Stocks might be drawing over time, but OECD data show an increase in stocks in July taking them back to record levels. As well, Chinese crude buying – which has provided strong support to the crude market since April - slowed sharply for September and October deliveries leaving unsold barrels piling up. In addition, persistently weak refinery margins provide little incentive to boost crude purchases. Finally, we see that trading houses are once again looking to charter ships to store oil.

With the on-coming northern hemisphere winter, we will enter uncharted territory regarding the virulence of Covid-19. In last month’s Report, we said that the market was in a state of “delicate re-balancing”. One month later, the outlook appears even more fragile.

The uncertainty created by Covid-19 shows little sign of abating. In Europe, the number of new cases has risen as the holiday season ends, though the rate of hospitalisations and deaths is lower than seen earlier this year. Case numbers in the United States are falling and the situation seems to be improving in Japan and Korea. However, in various places, the situation is worrying and we are seeing localised lockdowns. Some countries, for example France and the UK, have introduced measures such as mask-wearing obligations and restrictions on gatherings and they may yet go further to fight the pandemic. These developments weigh heavily on economic activity and lead to lower expectations for a recovery in energy demand. Home working reduces demand but fear of using public transport is leading many workers to use personal vehicles. Factoring these unprecedented developments into conventional analysis is very challenging, to say the least.

New data show that global demand from January to July was 10.5 million barrels per day below last year’s level. As national lockdowns eased there was an initial sharp recovery in demand led by gasoline, but the curve has flattened out and it is becoming increasingly apparent that Covid-19 will stay with us for some time. For example, India has seen a continued upsurge in Covid-19 cases, contributing in August to the biggest month-on-month fall of oil demand there since April. In this Report, we have reduced our estimate for global demand growth in the second half of this year by 0.4 mb/d. For 2020 as a whole, we see the fall in demand versus 2019 at 8.4 mb/d, slightly deeper than last month. At 91.7 mb/d, demand has returned to its level in 2013.

In August, we saw the first impact of the easing of OPEC+ production cuts from 9.7 mb/d to 7.7 mb/d. We estimate the actual output increase by the group at 1.3 mb/d as some countries produced less than their target to compensate for earlier non-compliance. On the downside, the United States saw output drop by 0.4 mb/d in August due to Hurricane Laura but it is recovering in September as additional shut-in volumes come back on line.

With global output increasing overall, plus our downwardly revised demand data, we now calculate implied stock draws in the second half of the year at about 3.4 mb/d, nearly 1 mb/d less than estimated in last month’s Report. Stock draws suggest firmer prices but the front of the price curve moved down during August and prices for physical barrels (Dated Brent) fell below front-month futures, usually a sign of weakness. Stocks might be drawing over time, but OECD data show an increase in stocks in July taking them back to record levels. As well, Chinese crude buying – which has provided strong support to the crude market since April - slowed sharply for September and October deliveries leaving unsold barrels piling up. In addition, persistently weak refinery margins provide little incentive to boost crude purchases. Finally, we see that trading houses are once again looking to charter ships to store oil.

With the on-coming northern hemisphere winter, we will enter uncharted territory regarding the virulence of Covid-19. In last month’s Report, we said that the market was in a state of “delicate re-balancing”. One month later, the outlook appears even more fragile.